Different wheat market, same marketing strategy

Between June 1 and Dec. 31, the average daily wheat price was $7.07 in 2007, $4.71 in 2006, and $3.34 in 2005. The maximum price change from one day to the next was 42 cents in 2007, 27 cents in 2006, and 12 cents in 2005. And the average price change from one day to the next was 13 cents in 2007, six cents in 2006, and four cents in 2005.

The average percentage change from one day to the next was 1.8 percent in 2007, 1.3 percent in 2006, and 1.1 percent in 2005. The good news is that producers have higher prices. The bad news is that producers must deal with more price volatility.

Higher prices and volatility also apply to inputs. Since 2004, the cost of fuel has increased about 80 percent. Fertilizer costs have almost doubled. Rents have increased and the cost of machinery is higher.

Improved economic conditions in China and other Asian countries have increased the demand for all commodities. World wheat use has been greater than production for seven out of the last ten years and equal to production for one year.

The world's wheat stocks-to-use ratio has declined from 35.6 percent in 1998 to a projected 17.9 percent in 2007. The U.S. wheat stocks-to-use ratio is at 12 percent, which is a record low.

Both producers and buyers fear below average production. Stocks are so tight that there is no slack for below average production. U.S. wheat ending stocks are projected to be 280 million bushels. 280 million bushels is only enough wheat to meet 88 days of domestic use and 44 days of total wheat use.

To equal 2007-2008 wheat marketing year wheat use, world wheat production needs to be 22.7 billion bushels and U.S. wheat production needs to be 2.24 billion bushels. With a 5 percent increase in both U.S. and world wheat planted acres, both U.S. and world production is expected to surpass these levels.

Higher world production than 22.7 billion bushels and higher U.S. production than 2.24 billion bushels should result in an increase in ending stocks. At this writing, I expect U.S. wheat production to be 2.3 billion bushels and world wheat production to be 23.2 billion bushels

Ending stocks in 2008-2009 are expected to be slightly higher than 2007-2008 ending stocks. However, Kansas City Board of Trade wheat prices should remain above $7 through September 2008.

The dilemma is that 2008-2009 wheat marketing year prices could be $2 higher than the current forward contract price of $8 for June delivered wheat, or the price could be $2 lower. Producers will not know what the price will be until it is posted at the local elevator.

Marketing under these volatile conditions should be conducted the same as it was when prices were in the $3.50 range. No one could predict prices when they were $3.50 and no one can predict them now.

When you cannot predict prices, the best marketing strategy is to have mechanical marketing strategies. One strategy is to simply sell all the wheat at harvest. Over time, this strategy has produced a price that is near the top.

Another strategy is to sell wheat in one-thirds. Sell one-third at harvest, one-third in late September or early October, and the final third in mid-November. With this strategy, the producer is always right. If prices go down after harvest, some wheat had been sold at the high price. If prices go up, there is wheat to sell at the higher price.

Irrespective of the strategy, the most important thing is to have a strategy. Research has shown that, over time, the cardinal sin is not having sold the wheat by December 1 after it has been harvested.